Q1 GDP Flops as Expected – now what?

Q1 GDP Flops as Expected – now what?

Friday the first estimate for Q1 GDP was released and as we’d expected, it was a serious flop at just 0.7 percent growth for the quarter versus expectations for 1.0 percent. The weakness was driven primarily by weak consumer spending which was the weakest since the fourth quarter of 2009. Meanwhile, consumer sentiment is still rockin’ and rollin’ along with optimism and the talking heads on mainstream financial news are quick to brush this quarter off to the usual weather and this year to the late tax refunds – it’s always sumthin’!


This morning we learned that Personal Income rose just 0.2 percent in March versus expectations for 0.3 percent and last month’s increase of 0.4 percent while Personal Spending was flat versus expectations for a 0.2 percent increase and a 0.1 percent increase the prior month. Personal Consumption Expenditures Index fell 0.2 percent in March, the first drop in this measure of inflation since February 2016 and the biggest one-month drop since January 2015.

We’re not terribly convinced of this whole “seasonal” thing when wage growth remains elusive despite supposed “full employment.” You know things are feeling toppy when the use of ” ” increases!

The ISM Manufacturing Index also came in below expectations, falling to 54.6 versus expectations for a decline to 56.5 from 57.2 in March. Looking at the individual components of the report, 10 of the 11 are improved on a year-over-year basis, but on a month-over-month basis, 7 of 11 declined. The employment component saw its largest monthly drop since November 2008, which doesn’t bode well for this Friday’s employment report. On a more positive note, the export orders component hit its highest level since April 2011, which indicates considerable strength from overseas markets. The other manufacturing measure, Markit Manufacturing PMI came in unchanged from flash estimates and met expectations, but was also sequentially weaker.

Construction spending dropped 0.2 percent in March and has been fairly weak on a year-over-year basis. Last week the Trump administration announced a 20 percent tariff on lumber imported from Canada. This type of lumber is typically used in residential single-family homes and according to the National Association of Homebuilders, tariffs between 15 percent and 25 percent are expected to increase the price of new homes by an average of $1,000. This presents another headwind to the already weak construction sector which, when it comes to at least home building, has claimed that one of the major headwinds impacting the historically very low inventories is the level of regulation/permitting involved.

On a more positive note with construction, on a three-month annualized pace, construction spending has been the strongest since March of 2016 with two consecutive months of double-digit 3-month annualized spending for the first time since 2015. Residential Housing Investment has improved by 26 percent over the past three months.

At the other end of the spectrum, Office Construction is down almost 15 percent at an annual pace in the last three months, the slowest pace since April 2013, confirming the data we’ve seen indicating rising vacancies and falling rental rates.

Bottom Line: While sentiment remains robust, the hard data paints a picture of a more mixed economy with some concentrated areas of strength, while the overall picture remains an economy that is growing at a very subdued pace. As usual, the mainstream financial media is claiming the first quarter results can essentially be dismissed as due to seasonal effects, but with the various confirming data points we’ve seen, we still believe that we are in the very late stages of the business cycle and are likely to see continued weakness in the months ahead.

Dow on Track for Longest Losing Streak Since 2011 as Trump Trade Stalls

Dow on Track for Longest Losing Streak Since 2011 as Trump Trade Stalls

We are shocked, shocked and just shocked I tell you. President Trump has not been able to effortlessly end the gridlock in D.C. and push through his agenda. Hmmm, something so new and novel for a resident of the White House.


This morning the Wall Street Journal reported that,

Stocks around the world fell Monday, putting the Dow Jones Industrial Average on track for its longest losing streak since 2011 as doubts percolated about the Trump administration’s ability to push through on campaign promises.

You don’t say. Doubts? Why on earth? Apparently, others are starting to wonder just how easy this is all going to be for the new administration,

“There is some real concern about whether [President Donald Trump] is going to be able to get these policies through,” said Dianne Lob, managing director for equities at AB. “I think the theme for the year will be uncertainty.”

“Markets are questioning the high expectations built over the past few months,” said Jeremy Gatto, investment manager at Unigestion. “[Mr. Trump] did promise a phenomenal tax reform package, and the market would be disappointed if we got something smaller than expected or nothing at all.”

What is surprising, we must admit, is that President Trump spent all of 17 days trying to push the ACA repeal/replace through. Let that sink in for a moment.

Donald the “I am the best dealmaker” candidate, who pledged that the first thing he’d do would be to repeal and replace the “disaster” of Obamacare, spent all of 17 days before calling it quits. Whether you think the ACA is a disaster or divine, on face value that doesn’t exactly look like solid effort. In comparison, it took Reagan about five years to reduce the top marginal tax rate from 70 percent down to 28 percent, but then Reagan enjoyed a higher approval rating at the time, which gave him more firepower. What we’ve seen here is that enough Republicans, never mind the Democrats, are unafraid of Trump to thwart his efforts.

That’s not a good sign for the markets that have had quite the run-up based on the assumption that this time things are different and with Trump in the White House, sky-high valuations make sense and economic realities, such as an aging population, are no anchor.

Never fear, though! Those financial talking heads are spinning this as a positive because now, (thank God!) Trump can focus on tax reform, which will be the first attempt at major reform since 1986 no less! I’m sure that’s going to go much more smoothly given the consensus in Washington around spending, the national debt, and income inequality. Remember too that the Ryan plan for health care would have reduced the budget by $1 trillion, so any reform is already in the hole $1 trillion, but I’m sure this won’t be a problem – eye roll.

Then there is that resolution that’ll need to be passed in April to keep the government funded and then we get to experience yet another debt ceiling debate this summer. Get that popcorn ready, we are in for a show, which means more rocking and rolling in the markets as investors get their arms around just what are reasonable expectations for the new administration.

Up next for the Trump team, tax reform, deregulation, and infrastructure. Regardless of whether you love Trump and his plans or hate them, today the probability of success on any of those items is lower today than it was just a few weeks ago. Their successful implementation was expected to usher in accelerating growth, which would lead to inflation, but when we look at the yield on the 10-year Treasury today, we see it is still well within its multi-decade long-term downtrend. (Pulled from YCharts)


If the bond market was buying into this great acceleration story, would the 10-year yield really be at 2.4 percent? Mr. Bond market remains skeptical.

Keep in mind that over the past few months, the year-over-year data for commodity prices has been off of extremely low levels as the sector experienced quite the downturn this time last year, making small changes, on a percent basis look unusually large. If, as I suspect, we are not actually seeing a sustained acceleration in the economy, these increases should begin to moderate over the coming months. Stay tuned…

Since the beginning of March, all the major U.S. equity indices are down, from the small cap Russell 2000, down 4.2 percent to the S&P 500, down 2.2 percent to the Dow Jones Industrials down 2.5 percent. U.S. bank stocks have fallen around 8 percent from their recent highs, that’s a bit wobbly for what could be the first earnings season to toss cold water on those sky-high growth expectations under the new administration.

Bottom Line: The market’s “This time it’s different” fairy tale is fading. With earnings season right around the corner, we will be getting some hard data on just what is actually happening versus the optimism. We’ll keep you posted!

Source: Dow Poised for Longest Losing Streak Since 2011 – WSJ

Trump on accelerator while Fed tapping the breaks

Trump on accelerator while Fed tapping the breaks

While the headlines have been dominated by talk of whether or not President Trump can get Congress to work with him and to just what extent the Republicans will unite behind him, the bigger but much less obvious battle is between the White House and the Fed. While the Trump administration is talking all about accelerating the economy, the Fed is jawboning tapping the brakes.


The essential point, however, is that the Fed does not want faster growth. Fed officials estimate that the economy is already growing at something like the maximum sustainable pace. Fed officials predicted in December that the economy would expand 2.1 percent this year, slightly faster than the 1.8 percent pace they regard as sustainable. The Fed will publish new projections on Wednesday.

Spoiler alert, historically the Fed has always won this battle.

As investors and savers we would love nothing more than to finally see this economy back to normalized interest rates, with the Atlanta Fed’s GDPNow forecasting an abysmal 1.2 percent growth rate for the first quarter, after the sorry sub 2 percent we saw last quarter, this is hardly an economy that is at risk of overheating.

While Trump’s team is heralding bringing back jobs into the U.S., implying that there will be more jobs available to job seekers, the Fed is singing a different tune.

Fed officials, by contrast, see the pace of job growth as unsustainable. The unemployment rate fell below 5 percent last May. Since then, employment has continued to expand at an average of 215,000 jobs a month — more than twice the job growth necessary to keep pace with population growth. The faster growth is good news for the economy, indicating that adults who gave up on finding jobs are returning to work. The question is how long that can continue.

Team Trump is looking to accelerate the economy through a series of fiscal policies ranging from the repeal of the Affordable Care Act, to tax cuts to regulatory reform. The market is pricing in a high success rate with rapid implementation and negating, as it often does, the potential impact of rate hikes.

Recall that from June 2004 to June 2006 the FOMC hiked its federal-funds rate 17 consecutive times over 24 months for a massive 425 basis points total, more than quintupling the Federal Funds rate, which ultimately burst the economic and market bubble.

The bottom line is that fiscal and monetary policy takes time to have an impact, while today’s markets are priced for more immediate gratification. That’s a bit like buying that dress I love for next week’s event two sizes too small, because hey, I’m planning on hitting the gym hard! Optimism is great, but a little realism makes for longer-term success.

Source: Trump Wants Faster Growth. The Fed Isn’t So Sure. – The New York Times

Bond market dancing to a different tune than equities

Bond market dancing to a different tune than equities

Whenever we see trends in the market we immediately look for confirming data points. With the impressive rise in equity markets since the election, we look at the bond market to see if there is agreement on all this bullishness. There isn’t.

“The bond market is taking a totally different view from the equity market. Blowing raspberries is a good way to put it,” says Jim McCaughan, chief executive of Principal Global Investors. “There’s no belief that the growth agenda will be dramatic.”

After having thrown everything possible at the bond market, from a hawkish Fed to pro-growth promises from President Trump to ebullient sentiment surveys and a record-smashing equity rally, the best the 10-year Treasury can muster is to butt its head against 2.5 percent?

10 Year Treasury Rate Chart

10 Year Treasury Rate data by YCharts

The 10-year, 10-year forward rate is 3.6 percent, which is well below the long-run norm of 5.5 percent and implies a real neutral interest rate of around 1.6 percent. This at a time when the Federal Reserve is claiming that we are near full employment?

The yield curve — the relationship derived from the various maturities of Treasury bonds — also signals a subdued outlook. The difference between two- and 30-year Treasury yields stands at just 176 basis points, not far from the nine-year low of 140bp touched last August.

Yes, but what about all that glorious survey data?

According to David Rosenberg of Gluskin Sheff, going back to 2000 there was one other period in which Bloomberg’s economic surprise index for surveys and business cycle indicators was as unambiguously euphoric relative to market expectations. That was back at the beginning of 2011, which ultimately saw GDP for the year at a painful 1.6 percent with a macro backdrop so painful that the headlines were full of prognostications for a double-dip recession. Recall that at the start of 2011 the ISM manufacturing index started out at 59.6 but ended the year at 52.9.

Back to today and we see that the NAHB housing index looks to have peaked in December at 69, having fallen to 67 in January and then again down to 65 in February. AIA Architectural Billings confirmed this move, dropping to a four-month low of 49.5 in January after sitting at 55.6 in December.

We’d also like to point out that the recent NFIB index, while having made a new cycle high, also saw plans for capital investments drop to 27 from 29 while hiring plans fell to a 3-month low in February at 15 from 19 in January. Hot labor market? Atlanta Fed’s wage tracker hit a cycle high of 3.9 percent (yoy) in October and November, but dropped to 3.5 percent in December and then again to 3.2 percent in January, the weakest since January 2016 – not so hot!

An economy in need of cooling? Loans and leases tell a different story.


Headlines rarely give the whole story and the vast majority of investors buy at the top and sell at the bottom. That being said, we still do not believe this is a market that is safe to short, but valuations in light of the fundamentals have us wary of those lofty prices to say the least.

Source: Bond investors send warning for record high equity market

‘Trump Bump’ for Dow Industrials Is Biggest Post-Inaugural Move Since FDR – 

‘Trump Bump’ for Dow Industrials Is Biggest Post-Inaugural Move Since FDR – 

This morning I was on Varney and Company on Fox Business talking about the impressive run-up in U.S. stock indices. While we were on air, the U.S. markets opened and shortly thereafter the Dow broke to new highs at 20,700.

Only one other president in history has seen such remarkable gains since their election. After John F. Kennedy’s election, the S&P 500 gained 13.05 percent while post-Trump’s election we’ve seen a 9.7 percent gain. The post-election moves this time have been remarkably steady, as we’ve experienced 89 days without a 1 percent decline and the VIX has remained at multi-decade lows. Last Wednesday 8 percent of the S&P 500 saw new all-time highs.

An article in today’s Wall Street Journal declared,

“President Donald Trump has been doing a lot of bragging about the stock market rally lately. How does it measure up? By some measures, the rally that took place during Mr. Trump’s first 30 calendar days in office has been the largest since 1945. Since inauguration day on Jan. 20 through Friday, the Dow industrials climbed more than 4%.”

The strength in stocks hasn’t been just domestic, as the majority of the largest stock markets around the world are in overbought territory and not one of the thirty largest country-based ETFs is in oversold territory.

To put the U.S. gains in perspective, the Market Vector Russia ETF (RSX) has gained even more than the S&P 500, up 15.3 percent since the election versus 9.4 percent for the S&P 500 ETF (SPY).

Since President Trump’s inauguration, the iShares MSCI Mexico Capped ETF (EWW) has gained the most of any asset class, up 7.2 percent versus the S&P 500 (SPY) up 3.7 percent.

Pricing in the U.S., as we keep mentioning here, is at elevated levels, with the S&P 500 at the highest forward 12-month P/E/ ratio since 2004 at 17.6. This is well above historical norms as the 5-year average is 15.2, the 10-year is 14.4 and the 15-year is 15.2.

That forward P/E also assumes an exceedingly robust growth rate in EPS for the S&P 500 to be over 11% in the coming year, which is a profound change from what we’ve seen over the past 4 to 5 years. If we don’t get that kind of explosive growth, then today’s valuations are even more stretched.

Implicit in those assumptions is the impact of corporate tax and regulatory reforms on margins and the impact of individual tax reforms on spending. With the level of divisiveness in D.C. paired with 23 Democrats in the Senate up for reelection in 2018, Trump is facing an uphill battle to get his plans passed. Regardless of where one stands concerning the president, roughly half of the country is opposed to him, and those opposed are very vocal. House and Senate Democrats will be facing a lot of pressure from their constituents to not cross the isle and join the Republicans.

That being said, the level of momentum we see in this market is irrefutable, so shorting it is a dangerous business. Those who hop in now need to understand that they are going in for momentum, as the likelihood that all these hopes and dreams don’t come through promptly is pretty high, which means better buying opportunities are likely in store later on.

Source: ‘Trump Bump’ for Dow Industrials Is Biggest Post-Inaugural Move Since FDR – MoneyBeat – WSJ

America First? When it comes to GDP we get the bronze!

America First? When it comes to GDP we get the bronze!

Yesterday we talked about how the American economy, despite all the euphoric headlines since the election, didn’t deliver much of a performance in the fourth quarter and in fact we saw the weakest full-year GDP growth rate since 2011 which was well below the U.K.’s 2016 growth rate of 2 percent. Today we learned that the Eurozone as well kicked our economic tuckus in 2016.

GDP grows 0.6% in final quarter of 2016, beating expectations and taking annual figure to 1.8%

Yep, that hurt. So much for America being the “cleanest shirt in the economic laundry.” Despite headwinds ranging from the accelerating Greek drama to the mountain of Italian non-performing loans that led to the nationalisation of Banca Monte dei Paschi di Siena, Brexit, failed Constitutional reforms leading to the resignation of Prime Minister Renzi in Italy …. the list goes on, they beat us.


Last week talks between the U.S. and Mexico hit a serious bump after a President Trump Tweet led Mexico’s President Peña Nieto to cancel their upcoming meeting, while the administration has been threatening a 20 percent tax on imports from Mexico, which would put serious upward price pressure on, (among other things) fruits, vegetables and auto parts. Today Peter Navarro, Trump’s top trade advisor, accused Germany of currency exploitation. According to the FT, “In a departure from past US policy, Mr Navarro also called Germany one of the main hurdles to a US trade deal with the EU and declared talks with the bloc over a Transatlantic Trade and Investment Partnership dead.”

While last week’s meeting with the British Prime Minister Theresa May ended with some serious hand-holding, over the weekend the President’s sudden implementation of an immigration ban left, “our closest ally flailing after the UK government was openly contradicted by US diplomats over which British nationals were covered by the measure.”

After Trump’s election victory, the Bank of Japan was initially more optimistic about more favourable economic conditions amid expectations for stronger American growth. That enthusiasm has been fading as yesterday, ahead of a two-day policy meeting, officials are less optimistic about the impact on Japan’s economy. According to the Wall Street Journal, “We now realise that we know very little about him.”

Trump’s team has been poking our allies in some uncomfortable ways, making many around the globe nervous, and yet the VIX (a measure of implied volatility) is pretty much yawning.

The 90 percent of the America economy that is not represented by either inventory build or state and local government spending managed to grow at a whopping 0.6 percent annual rate in the fourth quarter.

Amidst all this, the Fed keeps talking about further rate hikes

Under Armour (UA) just released its fourth quarter and full year results and was yet one more citing currency headwinds.

Upon the announcement of Trump’s immigration ban on Friday, the markets started to fall. Monday the S&P 500 fell 60 basis points and is now down 0.76 percent from its most recent closing high last Wednesday. Bespoke compiled headlines over the past few days that reveal concerns the Trump hope trade is starting to fade.

Is this an inflection point? Too soon to tell, but we can say that having an administration with no political history who has pretty much tossed out the rule book is likely to cause heightened volatility, which is not reflected in market pricing. Erecting trade barriers and surprising the market, let alone allies, is likely to induce more caution in the C suite.

This morning we also saw that compensation costs in 2016 rose 2.2 percent, significantly faster than GDP of 1.6 percent, which makes another Fed hike more likely. We’ll be hearing from the Federal Reserve on Wednesday and will be looking to see if the tone from the FOMC meeting is more dovish than we heard in Fed Chair Janet Yellen’s testimony on January 19th. We will also hear from over 100 companies this week on their earnings, putting the relative complacency in the markets to a test.

Source: Eurozone’s economic recovery picks up speed